The Actuarial Society 2008 Life Seminar in Johannesburg late May was an opportunity to hear the views from the life industry on the impact that the new commission dispensation may have on its business and its intermediaries.Hantie van Heerden, an actuary at the FSB, made it clear that commission reforms were part of the overall process of enhancing policy values, improving cost effectiveness and assuring policyholder protection. The draft regulations promulgated in February 2008 and to be implemented before year end should be seen in the context of a process that began long before the Statement of Intent signed between the life industry and National Treasury.The long term objectives of this process included pension fund reform and it was envisaged that this meant full portability of policyholder funds between different providers.Ultimately, the aim was also commission deregulation which would only be possible if there was proof of adequate competition in the industry.Richard Treagus, from Old Mutual, said that although the Life Industry welcomed regulatory reforms there were a number of challenges to be faced. He pointed out that although costs would in future be borne more equitably by the policyholder, broker and life company, ‘as-and-when’ commission increased life company operational risks disproportionately. The life company would bear a greater cost burden due to early termination and it was specifically in the area of lapses and surrenders that there was great concern.Priority would have to be given to improving intermediary persistency levels.Another important aspect he mentioned was that the as-and-when commission model made prospecting untenable as an intermediary activity simply because it would become too costly. Alternative mechanisms to assist brokers with finding new business referrals would have to be found. He pointed out that intermediary shrinkage would be an inevitable result of compensatory reduction.Of equal concern was that there was distortion in advice on the purchase of products where there existed a commission bias. There was a specific need to re-examine commission structures on living annuities and single premium life products.Peter Dempsey, MD of Masthead, cautioned that we should not look at commission reform in isolation, and that perhaps too much emphasis had been given to this one aspect.He provided some interesting statistics on the typical broker and the impact of the new revenue model. The average broker was male, white and 48 years old. Typically a broker generated 30-40% new business per month.The impact of the new commission structure from research through Masthead members suggested:• A third would experience between 0-15% reduction in commission income;• A third would experience between 15-30% reduction in commission income; and,• A third would experience between 30-100% reduction in commission income.

As in other countries, fee-based advice was not a dominant model. Most interestingly, Dempsey mentioned that there were socio-economic, cultural and demographic differences in the types of products being purchased. Pure risk products weren’t necessarily the first choice of poorer clients. He also drew attention to the changes proposed to the legislation governing the FSB. Besides giving the authorities more teeth, it would allow for better risk management and advisers identified as high risk could expect regular inspections from the regulator.“The picture that emerges from the above is not good news for the industry,” comments Brent Wilson, editor of ITInews Online. “My view is that the cost of regulatory compliance, and the fit and proper requirements combined with reduced income from commission and the inability to convert commission to fees will inevitably lead to a reduction in the number of financial service providers.“We are going to lose valuable skills.”In addition the industry faces consumer perceptions that are going to be extremely difficult to overcome: There is a deep distrust of insurance – including FSPs, products, companies – and ultimately a lack of faith that service and performance expectations will be met – high profile financial scandals merely embed these perceptionsConsumers seem not to value financial advice and do not accord financial service providers the same status as other professions – at least not yet. He says there is a massive information gap between actual consumer knowledge and the knowledge required to understand the products being soldBut perhaps the most difficult challenge we have to face is the fact that South African consumers are inveterate debt junkies.According to the Business Day, “Household debt in SA had quadrupled to more than R1-trillion in the past five-and-half years.”“SA’s credit market, which includes business, corporate and household credit extension, is estimated at about R2-trillion. The [NCR] Mr. Davel has said 300000 over-indebted households were saddled with a R30bn debt burden while 1 million “debt-stressed” South Africans owed more than R50bn.”Not only has the easy credit of the last four years led to reduced national savings, but rising inflation and interest rates as well as rising fuel and food prices have also impacted widely, reducing discretionary spending.No wonder then that the life industry is concerned about lapses and surrenders!How then to address these challenges?Consumer behaviour needs to be changed – and a holistic solution is required.And do not think that this is purely about life insurance - it is quite simply a national imperative. Of paramount importance is the need for effective consumer education.Not only do we need to make a virtue out of savings, but perhaps we need to reward savings and investments more than we do consumption. By Brent Wilson, ITInews Editor